Later this month, the new Chancellor, Philip Hammond, will announce his first autumn statement. Among those keen to hear what he says will be consumer champion Martin Lewis, who wants Mr Hammond to demand a review of an issue that is trapping people into their current mortgages, costing them a fortune and stopping them buying their dream home.
The issue is that according to the UK’s Mortgage Market Review, the guidelines governing what lenders can offer, the amount that banks and building societies are allowed to lend is capped, on average, at 4.5 to five times a household’s annual income.
This ruling affects their willingness to grant applicants a mortgage, before they even take into account their credit history, mortgage repayment track record and direct debits, etc.
It sounds sensible enough, but critics say the cap is creating “mortgage prisoners” – people who are being told, in effect, that they cannot afford a cheaper mortgage.
This situation affects people who have had a mortgage for some years and are now paying the lender’s higher Standard Variable Rate. Naturally, they will want to switch to a new mortgage with a cheaper rate to save money or perhaps move house.
In many cases, due to the lower interest rate available with a new deal, they might end up paying roughly the same amount as with their current mortgage, even if the total they need to borrow is higher.
However, the rules on affordability will have changed from when they got their current mortgage, while the rise in house prices has also outstripped their salary increase. So, even if they have paid their mortgage happily for years, if the value of the mortgage they need exceeds the lender’s capped income multiple, they will be turned down.
In some cases, this is even if they have applied for a new mortgage from their current lender.
I understand that affordability checks are necessary and I must point out that not all lenders are so strict. There are also ways around the situation.
However, lenders also need to relax the rules. They should widen the criteria and treat borrowers like individuals by taking into account how they spend their money – especially since what they do with cash isn’t currently a consideration.
As long as they look a safe bet, they should be able to borrow maybe as much as 10 times their salary.
The lenders say that their hands are tied by EU rules, but others say it is their interpretation of the rules which is wrong, which is why the Chancellor is being asked to act in order to free the thousands of people imprisoned by their mortgages.
We’ll have to watch this space, but in the meantime if you would like advice on this or any other issues, contact us by using our quick enquiry form or by calling 01332 821 340.